The impact of inside ownership concentration on the trade-off between financial and tax reporting

Managers frequently encounter situations involving a trade-off between financial reporting and tax reporting incentives, This paper examines whether inside ownership concentration, a proxy for reduced capital market pressure, influences the balance of these two opposing external reporting incentives. The empirical tests use a sample of major asset divestitures to show that, for high tax-rate firms, managers of firms with lower levels of inside ownership concentration realize larger gains or smaller losses, on average. This work extends previous research by combining insights from the micro-economics tax incentives literature and financial reporting incentives literature, and by considering explicitly the effect of a firm-specific variable on the balance between these two incentives.